- BlackRock’s Jean Boivin is thinking about three major themes going into 2022.
- They are heightened inflation, slowing growth in Chinese equities, and a pivot to sustainability.
- Boivin says he likes the tech sector and remains overweight US, European, and Chinese stocks.
To some, the economic rebound that’s stupefied investors for most of this year is reminiscent of the economic recovery following the housing crisis over a decade ago.
But BlackRock, the world’s largest asset manager, with $9 trillion in assets under management, believes that the two recoveries could not be more dissimilar.
“This restart is nothing like the long, grinding recovery following the 2008-2009 financial crisis,” Jean Boivin, the head of the BlackRock Investment Institute, wrote in a weekly market commentary from Monday. “It’s more like the world turned the lights back on. Economic activity surged, corporate profits rebounded at an astonishing pace in the restart, and developed market equities ripped.”
“While the optimism of this rapid recovery is at the forefront of many investors’ minds as they head into a new year, Boivin is thinking about inflation, China, and sustainability.”
Prepare for more inflation
“Inflation is now here,” Boivin said, “driven by the unusual restart dynamics of extraordinary demand bumping up against supply bottlenecks.”
Boivin said that while he expects many imbalances in supply and demand to resolve by next year, he thinks inflation will persist into 2022 and eventually settle at a higher level than where it was before the pandemic. He attributed this partially to an “unusually muted response to rising inflation” by many central banks, which in the past were quicker to raise policy rates than they were this time around, when they seemed more “content” to let inflation rise, he said.
Policy responses to inflation have differed among the central banks, Boivin said. While other developed central banks are prepared to steeply increase interest rates, the European Central Bank and the
seem more tolerant of inflation, even as the Fed has “belatedly acknowledged inflation risks, he said.
“The Fed has achieved its new inflation goal to make up for past misses; the key now is how it interprets its more ambitious full employment mandate,” Boivin wrote, citing the Fed’s new bond-tapering schedule of $15 billion a month, with indications of acceleration. Boivin said that he believes the Fed will begin hiking interest rates next year but that he still expects the “most muted policy response to inflation in decades.”
For investors looking to profit from higher inflation, Boivin prefers equities “amid solid economic growth and historically low real rates,” as well as inflation-linked bonds, he said. He remains underweight US treasuries and developed-government bonds.
Among equities, Boivin is specifically overweight US small-caps, which he believes will “benefit from the cyclical rebound in domestic activity,” and European stocks amid attractive valuations and an increase in regional inflows and activity, he said. He’s also modestly positive on Chinese stocks as the Chinese government’s “regulatory clampdown” eases.
Keeping an eye on China
Some investors have grown disheartened about overseas market turbulence — and Boivin says they’re justified.
“China has emphasized social objectives and quality growth over the quantity of growth in a series of regulatory crackdowns that have spooked some investors,” he wrote.
Boivin said that investors could no longer ignore a growth slowdown in Chinese markets and that they should beware of the strategic competition between China and the US.
Even keeping these headwinds in mind, Boivin overall remains positive on Chinese equities and government bonds, as he expects regulations to diminish and monetary policy to gradually become more dovish in the event of an economic slowdown. To reflect a more bullish view, he recommended global investors “raise their allocations to Chinese assets for potential returns and diversification.”
The time for sustainability is now
“The net-zero journey is not just a 2050 story, it’s a now story,” Boivin wrote. He pointed to three factors that should compel investors to adapt their portfolios as soon as possible.
First, fossil-fuel prices surged this year, heralding a “lopsided transition towards low-carbon power,” he said. Boivin also described a “tectonic shift toward sustainable investing” that he’s seen playing out and that he believes “will give sustainable assets a return advantage for years to come.” Finally, Boivin believes that the changes companies are implementing to reduce their carbon footprint could open up investment opportunities.
While Boivin said he believes sustainability-driven repricing has just begun, he acknowledged that the risks around a “disorderly transition” are high, “particularly if execution fails to match governments’ ambitions to cut emissions.”
Boivin prefers developed-market equities, especially tech stocks, as a way for investors to profit from the implications of business’ climate-related shifts.
“Incorporating climate change in our expected returns brightens the appeal of developed market equities given large weights of sectors such as tech and healthcare in benchmark indices,” he wrote.